Crude Politics

What Bush gains from high oil prices

By Harry Cleaver
December 1990; pages 3, 10, 14; Volume 2, No 3

The following article is the text of a talk given by Harry Cleaver at a November 26 teach in sponsored by the UT Progressive Faculty Group and the Austin Campaign for Peace in the Middle East.

War for ... higher gas prices?

What is going on in the Persian Gulf? Why are we headed for war? Should we back the president, or oppose his policies? These are not easy questions to answer. They were not easy to answer in the early stages of the Vietnam War; they were not easy to answer in Central America. Yet we must try, for many lives hang in the balance. In what follows, I want to share my present thinking about some of the political economic issues at play in the current situation. Although I don't pretend to have all the answers, what I do see is not pretty and it suggests to me the need to mobilize against current American policy both at home and abroad.

Hussein and Bush: The Motives of 'Madmen'

Saddam Hussein's economic motives for taking over Kuwait are relatively transparent. Hussein needed money. He needed the money to rebuild after the long war with Iran while maintaining his army to cope with continuing internal resistance to his role from the Kurds (whom he has repressed and slaughtered), from the millions of foreign workers employed in Iraq (whom he has ruthlessly exploited), from Communists and Islamic fundamentalists (whom he has executed as quickly as he could identify and round them up) and from almost everyone else not part of his highly centralized political and military machine. He needed money to spread his Ba'athist ideology of Pan-Arabism and his own influence and power throughout the Arab world.

Prior to the invasion Hussein had threatened force to end the Kuwaiti (and UAE) practice of producing and selling more crude oil than their OPEC quota allowed, an action which tended to lower oil prices and to reduce Iraqi income from its own oil exports. Those threats achieved an OPEC capitulation on July 27 and agreement to cutbacks that would raise prices, but only about $3 a barrel. Hussein had also demanded some $30 billion in aid from the government of Kuwait and the other oil producers of the Gulf. The rulers of Kuwait were less than forthcoming. They reminded Hussein of their previous support during the war with Iran, of his outstanding debts to them and offered little more money. Kuwaiti refusal to comply with his demands created an obstacle to the realization of Hussein's goals. He sent in his army to remove the obstacle.

But if Saddam Hussein's motives are clear enough, and condemnable, what of George Bush's? Why did he order American troops into the Gulf? We can reject out of hand the explanation currently stressed by the White House - to resist aggression - as simply unbelievable in the light of the Contra war, Panama, Grenada and the Bush Administration's silence on Israel's occupation of the West Bank and the Syrian takeover of Lebanon. However, we must still take seriously the alternative, economic explanations which have been offered by the White House. First, of course, is the argument, made originally by Bush himself, that the troops were sent to defend "our way of life," i.e., cheap oil, cheap gasoline, gas guzzling cars and boats. Second, suggested at the same time and reinforced later by Baker, was the argument that defending cheap oil supplies also defends "jobs" - helps stave off recession and rising unemployment, such as that which followed the first "oil shock" in 1973-1974. Such arguments have some credibility because they have had some truth in the past or might have some in the future. But should we believe them today?

It is easy to argue that American policy toward the oil producing nations of the Gulf, and elsewhere, has at times been designed to guarantee steady supplies of cheap oil. Certainly this was the case in the post-World War II period and explains, among other things, the CIA overthrow of the Mossedegh government in Iran in 1953 which was seen as endangering Western control over Iranian oil. In those days cheap oil fueled post-war reconstruction in Western Europe and economic growth in the U.S. There are also good reasons to think that U.S. policy makers wanted a reduction in the price of oil in the early 1980s. The attack on the price of oil was part of a more general anti-inflationary policy which was really an anti-wage policy. That time policy makers achieved their ends less with direct force (unless you include the bombing of Libya) and more with global recession induced by tight money and high interest rates - a recession which dramatically reduced the demand for oil and thus its price. Such policies have always lent great credence to traditional charges of imperialism, of the shaping of foreign policy for the profits of American business.

But at other times, American foreign policy has favored not cheap but expensive oil, as in the early 1970s when American negotiators let it be understood by OPEC that the U.S. was not opposed to an increase in the price of crude oil. In those days high priced oil achieved a variety of ends. It helped the Gulf countries cope with internal instability by providing them with more resources. It undercut European competitiveness with the United States because it hurt Europe more than the U.S. In the U.S. (and around the world), it undercut real wages which had been rising faster than productivity (and thus hurting profits) by causing inflation while simultaneously making vast amounts of money available to Western business as the OPEC countries deposited their trade surpluses in Western commercial banks. As recently as April of 1986, then Vice President Bush hurried to the Persian Gulf to pressure Saudi Arabia and other Gulf states to cut production and raise prices - pleading "national security" and the economic needs of oil men and their bankers in the U.S.

The economics of invasion: Does Bush really want cheap oil?

So, which is the case today? What does the Bush administration hope to gain? Cheap oil or high priced oil? Certainly, in the short term its military actions and the blockade of Iraqi and Kuwaiti oil have driven up the price of oil dramatically (from about $18 dollars a barrel to over $40, dropping since to about $30). Although OPEC production has surged and already made up for blockaded Iraqi and Kuwaiti exports, prices remain high based on fears of future conflict and future shortages. The persistence of conflict keeps prices high. If Bush orders the troops against Hussein's army widespread destruction in the oil fields may actually reduce oil supplies and further drive up prices.

If Bush's policy advisors do want cheap oil, only in the long term can current actions be argued to be consistent with such an objective - assuming that preventing Hussein from controlling Iraqi and Kuwaiti oil would help hold down prices in the long run. Against the argument that Hussein's control over the combined oil exports would result in higher oil prices we must set what we know about the workings of the international crude oil market and the behavior of its major suppliers. As OPEC was beginning to discover, even before the global recession brought on by the Reagan Administration in 1982, persistent high oil prices lead to increased conservation, the development of alternative energy sources and new supplies, all of which tend to bring down the price. Any country with very large oil reserves, such as Saudi Arabia, has a vested interest in keeping prices at a level below that which would bring about such problems. A Saddam Hussein in control of both Iraqi and Kuwaiti oil fields would be such a country. It is hard to see why it would act against its own long term interests by raising the price much above that favored by the Saudis.

Our new allegiance

What about the possibility that the Administration is really pursuing a high priced oil policy while claiming to want cheap oil - the kind of thing that was done in the early 1970s? There is some evidence of this, partly to be deduced from the actions of the Administration, partly from that of its allies in the Gulf, especially the Saudis. According to press reports, last January a former U.S. ambassador, "still used by the Bush Administration for foreign policy missions," told one of Hussein's closest associates that Iraq should engineer higher oil prices to get it out of its difficult economic situation. Moreover, leaked tapes of conversations between U.S. ambassador April Glaspie and Hussein shortly before the invasion suggest American agreement with Hussein's desire for higher prices (as well as a more widely discussed "neutralism" with respect to inter-Arab disputes whose articulation is widely interpreted as having left Hussein with the impression - apparently mistaken - that he could take over Kuwait with impunity). Furthermore, before the invasion that Iraqi pressure for OPEC cutbacks and price hikes had been supported by the Saudis who had threatened not only Kuwait but also the United Arab Emirates with no military protection because they were exceeding their OPEC quotas. Thus, the White House's closest ally, the Saudis, took a position similar to that of Hussein, at least with respect to oil prices. In the midst of this intra-OPEC feud, the White House backed up Iraq by opposing Congressional economic sanctions against that country.

What would the Bush Administration and the business interests it represents gain from high oil prices? To start with, the would gain some, but not all, of the same advantages they did in the mid-1970s:

  1. Oil producers and those tied to them would have more resources to cope with internal stability - a serious problem in the wake of the debt crisis and domestic protests in countries such as Jordan, Iraq, Iran, Nigeria, Trinidad and Venezuela.

  • Generalized inflation would cut real wages everywhere, again transferring wealth from workers to business via international banks. The Saudis alone may have a $20-30 billion current account surplus available next year to invest in the West.
  • Because of increased efficiency abroad, stronger economies and a declining dollar, increased oil prices would have less of a recessionary impact on Western Europe and Japan than on the U.S., but real oil shortages would hit them more than the U.S. which imports far less of its energy needs.

    Added to these old advantages are some new ones:

  • The militarization of the Gulf is a devastating blow to the workers in that area, both local and foreign "guest" workers. The repression of foreign workers, including Palestinians, in Kuwait (who have fled by the thousands across the border into Jordan), the expulsion of hundreds of thousands more from Saudi Arabia into Yemen and the dramatic drop in repatriated wages have wrought havoc among workers of the whole area. Such violence undercuts such workers' struggles to share the oil wealth of the area and strikes back against the kind of upheaval mentioned in point #1 above.
  • The Gulf conflict is providing the White House and its friends in the energy industry with an excuse to set aside environmental controls in the name of "national security." Reversing previous support for some limitations on offshore drilling, the Administration is now pushing hard for drilling off the coast of California and in the Alaskan Wilderness (which has so far been resisted by Congress). There is a parallel effort to use the crisis to help revive the defeated nuclear industry.
  • High oil prices will help Bush's new "partner" Mikhail Gorbachev attract foreign investment to the stagnating Russian oil fields, obtain the resources to carry out perestroika and avoid a destabilizing break up of the USSR.
  • At the same time high oil prices will help impose even stiffer austerity on the peoples of Eastern Europe making them more pliable to integration into the global economy as a new source of cheap labor - especially when the USSR follows up its summer cuts in deliveries by charging hard currency for its oil exports starting in January 1991.
  • The Gulf conflict provides the military industrial complex the reasons it has lacked for continued heavy defense expenditure for the rest of the century. The end of the cold war spelled crisis for that complex and the possibility of new "peace dividends" for others. With the Gulf intervention as a model (following Panama and Grenada) a new need for vast sums of money is clear.
  • Simultaneously, sustained military expenditures provide an excuse for continuing the attack on social services, entitlements, student loans and subsidies for low income housing, in other words, a continuation of the social repression of the last ten years.
  • Last, but perhaps not least for oil man Bush, increased oil prices will raise the profits of American oil producers and encourage more production - which hit a 26 year low in 1989. They would also raise the value of oil real estate and the viability of many loans, especially in the Southwest, whose falling values have contributed to the current financial crisis in both Savings & Loan and banking industries.

    Recession and Upheaval: Disadvantages to Bush's Policy

    Against this list of advantages we can examine the apparent disadvantages of high priced oil. The most obvious of these would seem to be the way higher energy costs and military expenditures will tend to accentuate both trade and federal budget deficits and add to recessionary pressures which were accumulating even before the invasion. Does the Administration want recession? It has not said so, of course, no American policy maker ever does, even when desired. Reaganomics was touted as producing cost free growth at the very moment its tight money precipitated the sharpest depression since the 1930s.

    The price paid, & it's not by politicians

    Recent behavior on the part of the Federal Reserve, whose five year plan to reduce inflation to zero seems hopeless without a recession, echoes the same rhetoric and policy objectives that characterized the earlier Reagan-Bush period, albeit with much less intensity. Even before Hussein took over Kuwait the business press was bemoaning rising inflation due to wage increases exceeding productivity gains. After the invasion, "the fact that the central bank chose not to push interest rates lower in the early stages of the Persian Gulf crisis," wrote The New York Times recently, "may prove to be the deciding factor in hastening an economic downtown."

    In the earlier Reagan-Bush period of the early 1980s anti-inflationary recession brought a drop in oil prices at the same time it cut employment and wages. Today such effects might well be offset by war and restricted oil supplies giving both recession and inflation, a situation more like that in 1974-1975 after the first oil shock - even if the Fed does not loosen the monetary strings as much as it did in that earlier period. Thus a recession would seem to be compatible with all the other goals outlined above.

    It is also possible that the recessionary impact of the Bush Administration's Gulf policy will be partially or totally offset by the expansion of military expenditure and a renewal of our familiar Keynesian permanent arms economy. As mentioned in Advantage #8 above, the military-industrial complex is clearly delighted with current policies. Post-Great Depression American history has provided ample testimony to the efficacy of expanded military expenditure in stimulating general economic expansion. World War II, the Korean War, the Vietnam War, and the Reagan arms buildup all contributed, to a greater or lesser degree, to economic expansion. A renewal of such policies can be expected to have similar effects.

    Some are even suggesting that the current conflict is a manifestation of the political business cycle. That is to say Bush is willing to go to war to avoid a recession which would undercut his chances in the next presidential elections. It is hard not to be appalled by such policies, whether aimed at 1992 or beyond, especially when they are being coupled with complementary attempts to drive down standards of living and renew the unimpeded exploitation of natural resources in pursuit of profit. What we seem to be faced with is a late Twentieth Century capitalism which is morally, socially and politically bankrupt, totally unable to address itself to the meeting of people's needs.

    Of course, all these policies may fail - not only in the long run, but even in the short run. The dangers of the crisis for the Administration and its business allies - as well as the opportunities for than opposed to them - is that instead of producing submission and willingness to accept sacrifice, people will respond militantly and demand dramatic changes in policy. The danger of using the Gulf conflict as an excuse to strike out in all directions, to tip the balance against many foes, at home and abroad, is that those foes will recognize their common enemy and unite against the White House and its patrons.

    The last time American policy makers sought to use high oil prices to undermine wages in the West and to stabilize the Middle East - 1973-1974 - resistance was widespread. In Egypt, when Sadat gave in to banker pressures to impose austerity on his people in 1976 by cutting subsidies and raising the price of basic food stuffs, they rose up instead and forced him to reverse the price increases. While the oil price increases gave more money to America's primary ally in the Persian Gulf - the Shah of Iran - he was forced to concede growing amounts of it to popular demands. Despite such concessions, the victims of his bloody rule soon overthrew him in 1978. In many countries of the Third World, the refusal of people to accept dramatic cuts in real income through increased imported oil prices forced their governments to support them with increasing amounts of recycled petrodollar debt. In the United States and Western Europe workers fought to defend their real wages by forcing money wages up as fast as inflation, even as unemployment rose, thus adding a new word to the economists' vocabulary: stagflation.

    That the threat of war, and war itself, can be used to achieve political economic ends by other means is a lesson we Americans learned the hard way. Vietnam taught us to recognize such methods and to resist them. When President Jimmy Carter used rhetoric about the energy crisis being the moral equivalent of war to try to gain support for "collective sacrifice", i.e., wage cuts, Americans refused to go along. Soon after Carter, his generals and the Committee on the Present Danger tried to use the specter of limited nuclear war to achieve acquiescence to their political and economic policies in the U.S. and Western Europe. Instead they got the biggest peace movement in history. Ronald Reagan and Alexander Haig sought a real war in Central America, but a reborn anti-war movement mobilized in response to the reinstitution of draft registration and prevented direct American military invasion. We then had to fight support for the contras and continue to oppose aid to the torturers and murderers of El Salvador and Guatemala - but we have prevented direct military intervention. Only in Grenada and Panama, have we failed to prevent the direct use of the White House's mailed fist. Now Saddam Hussein has given George Bush an opportunity to test the limits to the American people's resistance to the use of military force for covert goals. Is the "Vietnam Syndrome" over? Will we standby and accept policies against which we have fought for years? Will we accept now what we wouldn't accept before? Or, will we organize ourselves once more and put together a coalition capable of blocking Bush's policies?

    Soldiers fighting for unknown causes